Is Britain finally getting a pay rise? Inflation and skills shortages push private sector pay expectations to seven-year high

New CIPD/the Adecco Group research shows short-term improvements to pay, but skills shortages look set to persist 

After six years stuck at 2%, basic pay award expectations in the private sector have increased to 2.5%. Meanwhile basic pay award expectations in the public sector have fallen from 2% to 1.1%, according to the latest Labour Market Outlook from the CIPD and the Adecco Group. The report highlights the effects of a tighter labour market on skills shortages as seven in ten (71%) of employers with vacancies report that at least some of them are proving hard to fill.

Pay outlook

The Labour Market Outlook (LMO) surveyed 1,254 employers on their pay, recruitment and redundancy intentions for the first quarter of 2019. It found that basic pay expectations in the private sector have increased from 2% to 2.5%, the highest registered figure since tracking began in 2012. 

Overall employers’ intentions remain stable at 2% for the sixth successive quarter. With inflation forecasts currently below 2%, this will mean a real terms pay rise for many in 2019. 

For employers that expect to increase pay by 2% or more, inflation remains the driving factor (42%) for this, followed by the need to pay the going rate of pay elsewhere (38%). The LMO data shows that skills shortages will continue to put pressure on wages, and starting salaries in particular. Two-thirds (66%) of private sector firms have increased starting salaries in response to recruitment challenges, up from 56% in the previous quarter. In contrast, just over a quarter (27%) of public sector employers are taking this approach, down from 43% in Summer 2018. Private sector employers are also far more likely to raise overall salaries (62%) than public sector employers (34%) in response to retention pressures. 

While pay increase expectations have risen to 2.5% in the private sector, expected pay growth in the public sector has fallen from 2% to just 1.1% widening the gap in private and public pay.

Overall, more than two in five (43%) of employers said that it was too hard to tell how pay would change or that it would depend on their organisation’s performance. 

Jon Boys, labour market economist for the CIPD, the professional body for HR and people development, comments: 
“If we’re to see sustained improvement to pay we must look at what is preventing individuals from being more productive at work. If we can improve how managers train, develop and apply peoples’ skills at work, our businesses will be much more productive. Productivity is 22% lower than it would have been if the pre-financial crisis trend had continued. As a result pay growth is woefully behind. 

“While the private sector is more willing to spend money in response to recruitment and retention challenges, the public sector’s hands are tied. Employers will need to think far more creatively about how they attract, develop and retain their staff to boost both skills and productivity.”

Recruitment Outlook 

The report’s net employment balance – a measure of the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels – has fallen to +20 continuing a downward trend from a high of +26 in Summer 2018. 

The tightening of the labour market can be seen in the fact that seven in ten (71%) of employers with vacancies report that at least some of them are proving hard to fill, an increase from 64% in the same quarter as last year. Overall, employers in the public sector are more likely to have hard to fill vacancies than the private sector (77% compared with 69%).

Alex Fleming, Country Head and President of Staffing and Solutions, the Adecco Group UK and Ireland, states:
“The UK recruitment market maintains positive levels of demand despite the imminent uncertain future. Even though there has been a fall in the net employment balance, employers seem to be adapting to the idea that a skills-short market is a fact of life, and they are getting on with things regardless.

“Raising wages to attract or retain staff is certainly one option and a short-term fix, but the employers that will excel in our current environment will be the ones that think more holistically about their talent strategies.

“Organisations that identify the skills and traits they need to prosper, streamlining their process for attracting talent and building an environment that allows talent to thrive, will be the ones who succeed.”

Focus on productivity

Despite its importance to the economy, productivity is only a priority for 36% of employers and only half (50%) use the term when discussing organisational performance. LMO data suggests that employers are overconfident when it comes to assessing their own productivity, with just 7% believing their organisation’s productivity is below average. 

The report also makes a link between high performance working (HPW) practices and productivity. For example, it found that organisations that have productivity measures have a larger proportion of staff that received training and a larger proportion of staff that received a formal performance appraisal.